After passing the Series 65, what are some additional steps that may be taken to become a successful advisor? I am often asked this question, and I would like to offer a few thoughts that may prove helpful to your practice.

What does the client primarily need and want? In my experience, clients want a willing and able educator, counselor and fiduciary advisor. This article will consider a few details and examples in that relationship.

You have already demonstrated something to your clients by achieving the Series 65 license. The license imposes a fiduciary relationship when giving investment advice to your clients.

Now that you have demonstrated a willingness to work toward this relationship, increased ability through education will assist you in helping your client. How does one become able and educated? What products would you use? Individual stocks, bonds, mutual funds, separately managed accounts? What about asset allocation and finding uncorrelated assets? Do I consider real estate, commodities and alternative investments? If I am using mutual funds, do I look for mutual funds with the best returns and the lowest fees? What type of mutual funds should I use to set up a good asset allocation? How can I achieve the best downside protection?

These are all considerations, but rather than dwelling on products, consider advising the client in a holistic manner that integrates
elements of education, counseling and fiduciary advice when it comes to investing and deploying their hard-earned money. So, lets consider the role of educator first.

Clients are generally interested in what will work for them. They want to understand how the specific investment choices will affect their overall plan. Each client’s investment knowledge and sophistication will vary. Some may be wary of investment products that may actually be beneficial to them. Others may be inclined towards high risk investments that are not suitable perhaps for their age or position, and still other clients may be narrowly focused on one product. Lets look at an example of how this can work.

A couple, each 62 years of age, plans to retire in a year. Toward that end, they seek an investment advisor to assess the income they may rely upon from two retirement accounts. One partner has $400,000 in a traditional 401(k), and the second partner has a $100,000 Roth account. They intend to roll over the 401(k) into a traditional IRA and hope that both accounts will provide enough income in retirement. They want the accounts to be flexible and liquid, and are not interested in annuities. Their residence is paid off and they have no debt. They think they can live off their Social Security payments at age 62 with a little extra income from the IRA accounts. Supplemental income may be derived from one partner’s cabinetry hobby, which they may develop
into a small business. How much income can they rely on in retirement?
First, note that these clients — and this is true with many clients — have already put together a plan in the context of their own perspective. Their main concern is how much income the investment accounts can provide. Can their plan maintain adequate income through retirement without depleting all their resources? Maybe not as effectively as other management strategies that integrate additional options such as delaying claiming Social Security until a later date, the purchase of a commercial annuity and the
consideration of tax planning strategies.

This is where the advisor becomes indispensable in presenting additional strategies that are available to assist the client in reaching their long-term goals. For example, it may make sense for the couple to start using and drawing down their IRA accounts first for the purpose of deferring Social Security payments in order to receive higher monthly payments, larger dollar amounts from the cost of living adjustments and higher benefits for the surviving spouse. Optimizing Social Security benefits is among the most underutilized and underestimated strategies available to many retirees.

In addition, tax planning is an important consideration to review carefully with clients. Most retirees are faced with Social Security
taxes and IRA/401(k) taxes in addition to income taxes in retirement. This adds another important element when considering investments and effective planning for the client. When taxes are addressed, returns can be increased and can add to the longevity of various retirement accounts. The key point is that planning is not just about a good investment product that will provide income; rather, good planning takes into consideration all areas that can add to the overall effectiveness in attaining your clients' goals.

The second characteristic of a good advisor is that of a counselor. Why counselor? Let’s consider an example of market risk where
counseling is desperately needed. How many times has the investing public, acting without an advisor, been whipsawed by buying at the highs in the stock market and selling at the lows, whether through their 401k/IRA or individual investment accounts? Why does it happen? Well, for one, they buy high because there is no plan in place and they end up reacting to a rallying market, usually late in the game, because others are telling them about the high returns available and how they are missing out. They end up following the crowd and plunging right in without considering dollar cost averaging, entry levels and prices or exit points. Basically, no plan in place whatsoever.

Here comes the all-too-familiar whipsaw. When the market takes a dive, or goes into a strong correction, or maybe even crashes, those same people who invested in the market late are horrified at the losses on paper. They are completely wrapped up in the emotion of the moment, and they end up selling at extreme lows because, in their minds, they needed to stop the horrible bleeding of their portfolio. The investing public sells all the time at lows because they react to the market, rather than having a plan in place.
What can the advisor do? Here is where I would like to stress the role of counselor and how important it is in volatile markets, corrections and crashes. The wise counselor can have a monumental effect on the client and their portfolio by discussing risk beforehand and including a plan that addresses market risk. This starts with a conversation about risk tolerance, time horizon and attitudes about investing, and this needs to take place before the investment plan is implemented.

When this is done correctly, it will create a foundation to help the client understand how to effectively address the ongoing fluctuations. That doesn’t mean you won't have an emotional client ready to pack it in when sharp downward moves do occur in the market. Obviously, there will be concerns when this happens, and this is where prudent counseling can go a long way toward making informed and methodical adjustments. It may even be an opportunity to invest some excess cash in the market if it is available and not needed. Crashes are a great time to do this. Remember, this has to be money you are not counting on in the short term. I am not stressing any kind of market timing here, but rather, a dynamic tactical play that takes advantage of depressed prices and will have the effect of dollar cost averaging on steroids by buying at extreme lows. Planning, thinking methodically and not reacting, and using a long-term outlook will help the client stay away from emotional market decisions.

Now lets consider another extremely important principle of investing: asset allocation. By spreading out investments among various asset classes, the risk of owning one specific asset class is spread out. The idea being, if one asset class takes a dive, maybe another one will rally.

I am not going to discuss the details of Modern Portfolio Theory here, except to say that asset allocation generally works well. Typically in a crash, all asset classes become correlated and they all move down in value at the same time. However, some asset classes will rally back very quickly, and in addition, there could be some asset classes that were not correlated and actually moved
up in value when others were moving down. Bonds, commodities and alternative investments are a few asset classes that have been uncorrelated to the stock market in the last 15 years. If we can allocate the clients’ resources with an effective asset allocation, the total portfolio will not take as big a hit in a crash and will rally back with positive compounded returns that much more quickly. So, stay away from putting all your eggs in one basket and counsel your clients to do the same.
Some clients will be worried about assets going to zero. Can this happen to some of your clients' assets? Yes, as illustrated in the
dot.com crash of 2000, when a host of Internet stocks went belly up. Many investors put large chunks of their portfolio into these Internet stocks due to the hyped-up talk of a new paradigm. Everything Internet is golden. Buy anything that has to do with the Internet, was the general financial advice of the time. This is where the third and extremely important characteristic of a fiduciary advisor manifests itself.

A fiduciary advisor is obligated by law and ethics to always use the client’s best interest as the driving force of the advice. A fiduciary advisor does not take unnecessary risk in light of the client’s assets, age and goals. A fiduciary advisor will research investment product and use investment principles to provide sound planning.

While risky assets may be part of a portfolio, they should only be a part of the whole pie. The fiduciary advisor will never be caught up in hype or allocate large portions of a portfolio to stocks that have little or no earnings, like many of the Internet stocks in the dot.com crash. I think of the lyrics to Stevie Wonder's song "Superstition." “When you believe in things you don’t understand, then you suffer.” This is true of investments. When you invest in things you do not understand, you suffer. Research, knowing what you are invested in, is instrumental in effective decision making.

This brings me to another area where the fiduciary advisor can add value for the client. In the world of investments, the golden rule is if you take on additional risk, you need to be compensated for that risk with a higher return. This is true; however, there are ways to increase return without adding additional risk to an investment.

Let's take mutual funds as an example. I may increase returns without adding risk by researching and choosing funds with lower expense ratios and other costs that act as a drag on return. If we can reduce cost in any way on an investment, the return will be
that much better. While fees are an important consideration, it does not mean that you just look for funds with low expense ratios. Again, it is a matter of the whole picture. It means doing research and finding fund managers with proven records of returns that beat out their respective indexes and add real value to the fund. If an investment manager is getting higher returns than their respective indexes on a regular basis, it may make sense to pay a little bit more for his fee.

This is a key consideration when choosing funds. There are many mutual funds out there that charge a high investment management fee, and yet they are really closeted-index funds. This means the fund managers purchase exchange traded funds and other index funds in order to mirror an index like the S&P 500 or the Dow Jones Industrial. The cost of the investment manager may not be justified under these circumstances.

I hope this was helpful in illustrating some ways that a newly licensed advisor can be most successful when they are willing and able to educate, counsel and be a fiduciary to their client. Good luck to all. Constructive feedback and comments are welcome.

About the Author

PNI Streamline Review Inc. is a company that is dedicated to instructing financial professionals on how to quickly pass the Series 65 (Investment Advisor) exam on their first attempt. I have developed a proven process that is comprehensive and extremely effective in focusing the student on concep... More